Some thoughts on consumer debt, inequality and taxes

A recent report from Transunion, a Canadian credit agency, shows that consumers in B.C. carry the largest debt load in Canada. This debt includes credit card debt, but not mortgage debt. Given the real estate prices of urban British Columbia, it’s doubtful that adding mortgage debt would improve B.C.’s debtor status.

This status, of course, is not surprising. B.C. leads the country in inequality, particularly when we compare the richest quintile of families to the poorest. Like we’ve seen in the United States, B.C.’s consumer debt is being used as a temporary tool to overcome an imbalance in wealth.  But something has to give. Either average British Columbians regain a larger share of the GDP pie, or unpaid bills will start coming due. I shudder to think what would happen if interest rates went up; borrowing against one’s mortgage to pay consumer debt is a common way to stave off the inevitable. (Thankfully, the Bank of Canada is resisting a rate increase.)

The Transunion study also concludes that Canadians, including British Columbians, are actually lowering their overall credit debt exposure, if only slightly. This again parallels the recent American experience and historical trends. Like our American neighbours, we are facing an uncertain economic future; the rational behaviour is for households to pay down debt, particularly if its members are still gainfully employed.

But this in turn points to a weakness in the doctrine that general income tax cuts are an effective tool for economic stimulus. Generally speaking, when people are paying down debt (and saving more, as in the United States), tax cuts are usually added to this “pay down”. So in an economic downturn, tax “stimulus” is not injected back into the economy. The money is essentially wasted, and government debt spirals upward. Moreover, the cuts generally benefit those who can take the most advantage from the cuts (i.e. the top quintile), and offer little to the poor and unemployed (because they’re close to the basic exemptions already found in the tax code). So the rich get richer, and the poor get poorer… all in the name of tax-based stimulus.

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